Germany shows that making things still pays

Over the past 30 years, Germany has stuck firmly to its contention that a manufacturing base is vital for economic growth. And in 2013 it finds that its once derided position is firmly back in fashion, as countries that have relied too heavily on services attempt a manufacturing revival.

"Economic growth is directly related to the capabilities of the manufacturing sector in a given country," says Thomas M. Doebler, partner at Deloitte in Munich. "This has now been recognized in the United States, which is attempting a return to manufacturing after putting an emphasis on services over the past twenty years."

Meanwhile the heavyweight German companies continue to do well. Car makers BMW, Volkswagen and Daimler have all notched up big sales in important new auto markets such as China and Russia. Specialty chemicals and plastics firm Evonik Industries AG makes thousands of products ranging from hydraulic fluids to de-icing spray for aircraft, and, with sales of more than $18-billion (13.6 billion euros) in 2012, was second only to BASF in 2012 among German chemical companies.

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First quarter profits were up at chemical and pharmaceutical company Bayer AG, led by new drugs such as blood thinner Xarelto. Siemag AG is one of the world's leading plant and machinery manufacturers for the metals industry. Siemens AG is a global leader in building solar and wind power plants. And whether it is adidas sports gear, Bosch washing machines or Braun electric razors, shoppers around the world are used to picking up high quality German brands.

But in spite of these success stories, executives are aware of the need to address issues that could erode Germany's competitiveness globally.

In May, the World Economic Forum published a report titled Manufacturing for Growth, in collaboration with Deloitte Touche Tohmatsu, based on research that included discussions with more than 70 CEOs of multinational manufacturing companies around the world.

Almost all the German participants cited strict labour market regulation as a strong factor in limiting the competitive advantage of their country's manufacturing industry, and called for more flexibility in wage determination. Germany has a highly centralized system of bargaining for national wage contract agreements.

Another cause for concern is high energy costs, exacerbated by the fact that Germany is phasing out its nuclear power stations. This was already happening before the Fukushima disaster in Japan, but the process was sped up afterward. A natural gas pipeline from Russia became fully operational in November, 2012.

The CEOs almost unanimously considered innovation as crucial to the future of German manufacturing, and called for appropriate incentives to consumers, encouraging them to adopt new technology, for example electric vehicles. In addition, the CEOs would like to see an increased quantity of graduates in so called STEM areas (science, technology, engineering and mathematics), plus more co-operation between the public sector, universities and industry.

As countries such as Britain and the United States are finding, re-establishing skill pools can be difficult once they have been run down, but Germany has kept up its supply of skilled workers and graduates. It is a well educated work force, not just to the basic final exams taken at the end of secondary school known as the Abitur, but also solid training in engineering and mechanical skills.

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Traditional sectors such as machine tools, specialty steels, autos and chemicals continue to be important. Hamburg is one of the main production lines for Airbus SAS, with final assembly for narrow-body models, such as the A321 and final paint jobs for the A380.

With the help of exports of manufactured goods, Germany has been one of the most resilient economies in Europe since the crisis year of 2009. After a big 5.1-per-cent contraction in GDP in 2009, it grew by 4.2 per cent in 2010, and 3 per cent in 2011. However, last year, GDP was weaker at only 0.7 per cent, and the first quarter of 2013 barely registered any growth.

In the World Economic Forum's Global Competitiveness Report 2012-2013, which covers all segments of the economy and not just manufacturing, 144 countries are ranked based on hard statistical data combined with a survey of CEOs for more qualitative aspects.

"The intensity of domestic competition [ranked 8th] and a low level of market dominance by large enterprises compared to many European countries [Germany is ranked 2nd for extent of market dominance] is a reflection of the strength of small- and medium-sized companies in the Mittelstand," comments Margareta Drzeniek Hanouz, head of competitiveness research at the forum.

"But there are still concerns expressed by business executives about labour market flexibility on wage determination, ability to adjust the work force in response to a downturn or upturn, and wage levels that better reflect productivity changes across different industries," Dr. Drzeniek adds. Germany is ranked 119th on overall labour market flexibility.

German executives have also called for more regional growth clusters where private companies collaborate closely with the public sector, to help foster innovation. Germany already has some long-established institutes, such as Fraunhofer and the Max Planck Society, which work closely with industry, and co-operation between industry and the universities is getting stronger.

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The education system ranks 20th globally. And the excellent transport infrastructure ranks 9th.

Still, there are glitches and inefficiencies. For instance, at Berlin Brandenburg Willy Brandt Airport (BER), faulty wiring and non-functioning fire control systems forced the originally planned opening to be repeatedly put back from October, 2011. The opening date is now vaguely promised for some time in 2014, and BER has become a case study in poor project planning, with inflexible managers failing to react and confront problems as they emerged.

But, as the World Economic Forum surveys suggest, top management in industry are determined to combat complacency, and are casting a critical eye over education, training and competitiveness. In the manufacturing sector, they are making it clear to young trainees entering the work force that they are going to have to be increasingly well qualified in order to fit into a high tech world, and, in particular, compete head on with Asia.

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